Taxation Rules for the Minor Child

With the advancement of technology, children around the world are learning so many skills. It also helps them earn in many ways. If there is an income, there will be a tax liability. There is no age restriction for filing the income tax returns. So, all the minors who have an income in any way have to pay taxes. It is known as the Taxation for a minor Child. 

Understanding Earned Income and Unearned Income as per the Minors

There are two types of receivable income for minors:

• Earned Money: If the minor children earned money by using their specializations or skills, like winning a competition, contest, tournament, etc, then it will be considered as the earned money. This money also includes the salary or income earned from his venture or business. 
• Unearned Money: It includes the money that is not directly earned by the minor, but they have received it in various forms. It could be a gift from grandparents or relatives, interest income, or the income from the investments that their parents made in their names. This also includes the money from the interest earned through the savings bank account, fixed deposits, or any assets that have been transferred by his parents in his name. 

Is it Important for Minors to file an Income Tax Return?

All individuals must pay taxes if their income is above the basic exemption limit. Yes, the minors are also liable to pay the taxes. There are two modes by which the minor can file the ITR:

• By the Clubbing of the income of a minor child
• By filing his own ITR, that is, in the minor's ITR itself

Under section 64(1A), the income earned by the minor child is added to the income of the parent. This is called Clubbing of Income. Hence, the taxes are imposed in the same way as they are imposed on the parents' income. 

In this case, there are two situations: 

1. If the income of the minor is less than Rs 1500

In this case, the income of the minor child will not be added to the parent's income. Under section 10(32) of Income Tax Act, if the income is less than Rs 1500 of a minor child, then it will be considered tax-free. It is applicable up to 2 minor children. This income can also be the amount received as a gift from relatives, grandparents, parents, etc. 

2. If the income of the minor is more than Rs 1500

If the income of the child is more than Rs 1500, then it will be added to the income of the parent, and the parent has to pay the taxes on this amount. There is also a tax deduction available on the income of a minor child, which is Rs 1500 per financial year. It is applicable for a maximum of two minor children. 

Under section 64(1A), if the child receives income that is more than Rs 1500, it will be clubbed to the parent's income. This phenomenon is known as the "Clubbing of Money". In simple words, it is the pooling of the income of parents and their child. It is only applied to cases where the age of the child is less than 18 years old. 

Here are the rules for clubbing the Income:

• If both the parents of the minor child are earning, then the income of the child will be clubbed with the income of that parent who is earning more.
• If the parents are divorced, then the income of the minor will be added to the income of the parent who has custody of the child.
• If neither of the parents of the minor is alive, then in this case, a separate ITR is filed. This can be filed by the guardian of the child on his/her behalf. This ITR is filed separately, and it is not clubbed with the income of the guardian. The guardian must upload all the necessary documents on the income tax website to verify themselves as the representative assessee of the minor.
• If the minor daughter is married, then also the clubbing of income is counted.
• The provision of income clubbing is also applicable to the stepchild and adopted child.
• If the minor has crossed the age of 18 years, then they will no longer be considered as minors. Also, their income will no longer be clubbed with the income of the parents. 

A few exceptions where the Minor’s income will be taxed in his hands only:

1. Skills or Expertise: If the income earned by the minor is through his skills or talent, like by using his knowledge, then a different income tax return is filed by his parents or guardian. They are considered the representative assessees of the minor.
2. Disability: If the minor child is considered disabled under section 80U of the IT Act 1961, then his income will not be clubbed with the income of parents. In these types of cases, the minor should have more than 40% disability because of diseases like locomotor disability, poor vision, hearing impairment, blindness, mental illness, etc. In such cases, the income of the child will be mentioned separately in the child’s return only.
3. Manual Work: If the minor has earned the income by doing manual work, then this kind of income will be taxed in his own hands and reported in the Income Tax Return of the minor only.

Taxation of Minor's Income from Skill-Based Participations

When a minor child earns money by showcasing his/her skills, knowledge, or talent in various contests/tournaments, etc., in India, then they are liable to pay taxes on the winning amount. Under Section 115BB of the Income Tax Act, the money is taxed at the rate of 30% and there are no exemptions or deductions on this. Also, there is a 4% health and education cess is applied to this amount.

When the amount is credited to you, the basic tax of 30% plus 4% of cess is already cut from the prize money. If you evaluate the effective tax rate, then it is 31.2%. 

Ways to Invest and Save Tax for Minors in India

Parents have many options to invest the money for their minors, such as:

• They can invest in the bank fixed deposits or in the schemes offered by the post offices for a minor child. 
• They can invest in equities or mutual funds. They have to do some offline formalities, and there is some paperwork involved, as this process is not available to proceed online. 
• They can invest in equities. All they need to do is open a demat account in their child's name and use it to buy or sell shares. 

The interest which came from the investments is generally added to the parent's income, whichever is higher. Under section 10(32) of the Income Tax Act, they also get a tax deduction on the minor child's added income. The deduction is Rs 1500 or the actual income of the child, whichever is lower. One thing to note is that this deduction is only applicable in the old tax regime and not in the new one. 

Documents Required for Minors to File Their Own Return

Here are the documents that are required for a minor child if they want to file their own taxes: 

• PAN Card
• Details of your Income ( received cheque, received cash, cash deposits in bank, etc.)
• Active Mobile Number and Email ID
• Details of your savings, like savings interest, fixed deposit interest, contributions to funds, etc. 
• Login details of the E-filing portal
• Updated details of your bank, such as Name, IFSC Code & Account Number. 

Tax slab/rate Applied to Child Taxpayers for FY 2023-24

The income tax rate/slab for all the individuals (including minors and adults) is provided below:

The number of tax slabs is reduced from 6 to 5 under the new tax regime as per the recent budget 2023-24. Here is the new structure: